##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY
PERIOD ENDED JUNE 30, 2005.
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION
PERIOD FROM           TO
 Commission file number: 0-22187
 RENAISSANCE LEARNING, INC.
  Wisconsin
    
    39-1559474(State or other
    
    (I.R.S. Employerjurisdiction of incorporation)
    
    Identification No.)
 2911 Peach Street
P.O. Box 8036
Wisconsin Rapids, Wisconsin
 54495-8036
 (715) 424-3636
 þ o
 þ o
  Outstanding atClass
    
    July 29, 2005Common Stock, $0.01 par value
    
    31,704,835




---



RENAISSANCE LEARNING, INC.
 INDEX TO FORM 10-Q
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
 PagePART I   FINANCIAL INFORMATIONItem 1. Financial StatementsCondensed Consolidated Balance Sheets at June 30, 2005
and December 31, 2004
    
    
    1Condensed Consolidated Statements of Income for the Three Months and Six Months
Ended June 30, 2005 and 2004
    
    
    2Condensed Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 2005 and 2004
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    8Item 3. Quantitative and Qualitative Disclosures About
Market Risk
    
    
    12Item 4. Controls and Procedures
    
    
    13Item 5. Other Information
    
    
    13PART II  OTHER INFORMATIONItem 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    13Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 6. Exhibits
    
    
    15Form of Restricted Stock AgreementExecutive Officer Compensation SummaryCertificationCertificationCertificationCertification




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (unaudited)
 June 30,
    
    December 31,2005
    
    2004(In Thousands, Except Share and PerShare Amounts)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    13,469
    
    
    $
    27,460Investment securities
    
    
    21,124
    
    
    
    25,103Accounts receivable, less allowances of $1,429 and $1,283, respectively
    
    
    14,440
    
    
    
    8,441Inventories
    
    
    3,635
    
    
    
    2,364Prepaid expenses
    
    
    1,124
    
    
    
    1,194Deferred tax asset
    
    
    6,847
    
    
    
    3,800Assets of discontinued operations
    
    
    
    
    
    
    1,149Other current assets
    
    
    1,858
    
    
    
    453Total current assets
    
    
    62,497
    
    
    
    69,964Investment securities
    
    
    11,634
    
    
    
    21,003Property, plant and equipment, net
    
    
    11,975
    
    
    
    18,552Building held for sale
    
    
    6,486
    
    
    
    Deferred tax asset
    
    
    2,202
    
    
    
    1,620Goodwill
    
    
    43,121
    
    
    
    2,757Other intangibles, net
    
    
    8,886
    
    
    
    192Capitalized software, net
    
    
    386
    
    
    
    636Other noncurrent assets
    
    
    86
    
    
    
    Total assets
    
    $
    147,273
    
    
    $
    114,724LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,473
    
    
    $
    1,226Deferred revenue
    
    
    14,876
    
    
    
    16,484Payroll and employee benefits
    
    
    4,578
    
    
    
    3,983Income taxes payable
    
    
    4,543
    
    
    
    925Liabilities of discontinued operations
    
    
    
    
    
    
    1,650Other current liabilities
    
    
    6,224
    
    
    
    3,881Total current liabilities
    
    
    32,694
    
    
    
    28,149Deferred revenue
    
    
    622
    
    
    
    620Deferred compensation
    
    
    1,407
    
    
    
    1,354Other noncurrent liabilities
    
    
    74
    
    
    
    Total liabilities
    
    
    34,797
    
    
    
    30,123Minority interest
    
    
    207
    
    
    
    184Shareholders equity:Common stock, $.01 par; shares authorized: 150,000,000;
issued: 34,736,647 shares at June 30, 2005 and Dec. 31, 2004
    
    
    347
    
    
    
    347Additional paid-in capital
    
    
    56,534
    
    
    
    54,490Retained earnings
    
    
    110,422
    
    
    
    99,689Treasury stock, at cost 3,057,332 shares at June 30, 2005;
3,865,280 shares at Dec. 31, 2004
    
    
    (55,198
    )
    
    
    (70,213
    )Accumulated other comprehensive income
    
    
    164
    
    
    
    104Total shareholders equity
    
    
    112,269
    
    
    
    84,417Total liabilities and shareholders equity
    
    $
    147,273
    
    
    $
    114,724
  -1-




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 (unaudited)
 Three Months
    
    Six MonthsEnded June 30,
    
    Ended June 30,2005
    
    2004
    
    2005
    
    2004(In Thousands, Except Per Share Amounts)Net sales:Products
    
    $
    23,634
    
    
    $
    26,082
    
    
    $
    44,760
    
    
    $
    50,887Services
    
    
    4,712
    
    
    
    4,417
    
    
    
    11,143
    
    
    
    10,568Total net sales
    
    
    28,346
    
    
    
    30,499
    
    
    
    55,903
    
    
    
    61,455Cost of sales:Products
    
    
    2,325
    
    
    
    1,789
    
    
    
    3,514
    
    
    
    3,492Services
    
    
    1,811
    
    
    
    1,923
    
    
    
    4,571
    
    
    

    5,458Total cost of sales
    
    
    4,136
    
    
    
    3,712
    
    
    
    8,085
    
    
    
    8,950Gross profit
    
    
    24,210
    
    
    
    26,787
    
    
    
    47,818
    
    
    
    52,505Operating expenses:Product development
    
    
    4,037
    
    
    
    3,560
    
    
    
    7,655
    
    
    
    7,156Selling and marketing
    
    
    6,062
    
    
    
    6,941
    
    
    
    14,107
    
    
    
    15,565General and administrative
    
    
    2,961
    
    
    
    3,082
    
    
    
    6,030
    
    
    
    6,219Total operating expenses
    
    
    13,060
    
    
    
    13,583
    
    
    
    27,792
    
    
    
    28,940Operating income
    
    
    11,150
    
    
    
    13,204
    
    
    
    20,026
    
    
    
    23,565Other income, net
    
    
    502
    
    
    
    295
    
    
    
    958
    
    
    
    684Income  continuing operations before income taxes
    
    
    11,652
    
    
    
    13,499
    
    
    
    20,984
    
    
    
    24,249Income taxes  continuing operations
    
    
    4,311
    
    
    
    5,020
    
    
    
    7,764
    
    
    
    9,025Income  continuing operations
    
    
    7,341
    
    
    
    8,479
    
    
    
    13,220
    
    
    
    15,224Income (loss) on discontinued operations,
net of tax benefit of $0 and $507 for the three months
ended June 30, 2005 and 2004; and $1,417
and $1,022 for the six months ended June 30, 2005
and 2004 respectively
    
    
    
    
    
    
    (794
    )
    
    
    584
    
    
    
    (1,597
    )Net income
    
    $
    7,341
    
    
    $
    7,685
    
    
    $
    13,804
    
    
    $
    13,627Earnings per share:Basic:Continuing operations
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.43
    
    
    $
    0.49Discontinued operations
    
    
    0.00
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.05
    )Net income
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Diluted:Continuing operations
    
    $
    0.24
    
    
    $
    0.27
    
    
    $
    0.43
    
    
    $
    0.49Discontinued operations
    
    
    0.00
    
    
    
    (0.02
    )
    
    
    0.02
    
    
    
    (0.05
    )Net income
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Cash dividends declared per share
    
    $
    0.05
    
    
    $
    0.04
    
    
    $
    0.10
    
    
    $
    2.23
  -2-




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (unaudited)
 For the Six Months EndedJune 30,2005
    
    2004(In Thousands)Reconciliation of net income to net cash provided by operating activities:Net income
    
    $
    13,804
    
    
    $
    13,627Adjustments to arrive at cash provided by operating activities:Depreciation and amortization
    
    
    1,509
    
    
    
    1,848Amortization of investment discounts/premiums
    
    
    244
    
    
    
    433Deferred income taxes
    
    
    (225
    )
    
    
    18Gain on disposal of discontinued operations
    
    
    (702
    )
    
    
    Income tax benefit from the exercise of stock options
    
    
    26
    
    
    
    998Change in
assets and liabilities, net of effect of acquired business Accounts receivable
    
    
    (1,102
    )
    
    
    (296
    )Inventories
    
    
    830
    
    
    
    (426
    )Prepaid expenses
    
    
    229
    
    
    
    650Accounts payable and other current liabilities
    
    
    2,914
    
    
    
    (2,758
    )Deferred revenue
    
    
    (1,606
    )
    
    
    1,967Other current assets
    
    
    (9
    )
    
    
    268Other
    
    
    121
    
    
    
    32Net cash provided by operating activities
    
    
    16,033
    
    
    
    16,361Cash flows from investing activities:Purchase of property, plant and equipment
    
    
    (740
    )
    
    
    (644
    )Purchase of investment securities
    
    
    (164
    )
    
    
    (18,251
    )Maturities/sales of investment securities
    
    
    13,266
    
    
    
    27,520Capitalized software development costs
    
    
    (4
    )
    
    
    (404
    )Net proceeds from disposal of discontinued operations
    
    
    75
    
    
    
    Acquisition of business, net of cash acquired
    
    
    (33,353
    )
    
    
    Net cash (used in) provided by investing activities
    
    
    (20,920
    )
    
    
    8,221Cash flows from financing activities:Return of capital to minority interest
    
    
    
    
    
    
    (54
    )Proceeds from exercise of stock options
    
    
    832
    
    
    
    3,593Dividends paid
    
    
    (3,071
    )
    
    
    (69,121
    )Purchase of treasury stock
    
    
    (6,865
    )
    
    
    Net cash (used by) financing activities
    
    
    (9,104
    )
    
    
    (65,582
    )Net decrease in cash
    
    
    (13,991
    )
    
    
    (41,000
    )Cash and cash equivalents, beginning of period
    
    
    27,460
    
    
    
    62,524Cash and cash equivalents, end of period
    
    $
    13,469
    
    
    $
    21,524
 -3-




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##### Table of Contents



RENAISSANCE LEARNING, INC. AND SUBSIDIARIES
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (unaudited)
 1. Consolidation
  2. Basis of Presentation
   3. Earnings Per Common Share
    Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Basic weighted average shares outstanding
    
    
    30,617,025
    
    
    
    31,076,098
    
    
    
    30,716,224
    
    
    
    31,019,830Dilutive effect of outstanding stock options
    
    
    72,791
    
    
    
    178,116
    
    
    
    55,532
    
    
    
    209,136Diluted weighted average shares outstanding
    
    
    30,689,816
    
    
    
    31,254,214
    
    
    
    30,771,756
    
    
    
    31,228,966
  -4-




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##### Table of Contents



4. Comprehensive Income
  5. Goodwill and Other Intangible Assets
    June 30, 2005
    
    December 31, 2004Gross
    
    Accumulated
    
    
    
    
    
    Gross
    
    AccumulatedAmount
    
    Amortization
    
    Net
    
    Amount
    
    Amortization
    
    NetNon-compete agreement
    
    $
    1,100
    
    
    $
    1,017
    
    
    $
    83
    
    
    $
    1,100
    
    
    $
    908
    
    
    $
    192Tradename
    
    
    3,000
    
    
    
    
    
    
    
    3,000
    
    
    
    
    
    
    
    
    
    
    
    Customer relationships
    
    
    4,150
    
    
    
    
    
    
    
    4,150
    
    
    
    
    
    
    
    
    
    
    
    Prepaid royalities
    
    
    1,653
    
    
    
    
    
    
    
    1,653
    
    
    
    
    
    
    
    
    
    
    
    $
    9,903
    
    
    $
    1,017
    
    
    $
    8,886
    
    
    $
    1,100
    
    
    $
    908
    
    
    $
    192
 6. Stock Option Plan
  Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share amounts)Net Income, as reported
    
    $
    7,341
    
    
    $
    7,685
    
    
    $
    13,804
    
    
    $
    13,627Deduct: Total stock-based compensation
expense determined under fair-value based
method for all awards, net of tax
    
    
    1,359
    
    
    
    564
    
    
    
    1,607
    
    
    
    1,158Pro forma net income
    
    $
    5,982
    
    
    $
    7,121
    
    
    $
    12,197
    
    
    $
    12,469Earnings per share:Basic as reported
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Basic pro forma
    
    $
    0.20
    
    
    $
    0.23
    
    
    $
    0.40
    
    
    $
    0.40Diluted as reported
    
    $
    0.24
    
    
    $
    0.25
    
    
    $
    0.45
    
    
    $
    0.44Diluted pro forma
    
    $
    0.19
    
    
    $
    0.23
    
    
    $
    0.39
    
    
    $
    0.40
  -5-




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##### Table of Contents



7. Dividends
  8. Building Held for Sale
  9. Business Combinations
    -6-




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##### Table of Contents



Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004(In thousands, except per share amounts)Net sales
    
    
    36,658
    
    
    
    41,566
    
    
    
    71,196
    
    
    
    81,299Net income
    
    
    7,643
    
    
    
    9,807
    
    
    
    13,156
    
    
    
    16,414Basic earnings per share
    
    
    .24
    
    
    
    .30
    
    
    
    .41
    
    
    
    .51Diluted earnings per share
    
    
    .24
    
    
    
    .30
    
    
    
    .41
    
    
    
    .51
 -7-




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
 Results of Operations
     Three Months Ended June 30,
    
    Six Months Ended June 30,2005
    
    2004
    
    2005
    
    2004Net Sales:Products
    
    
    83.4
    %
    
    
    85.5
    %
    
    
    80.1
    %
    
    
    82.8
    %Services
    
    
    16.6
    
    
    
    14.5
    
    
    
    19.9
    
    
    
    17.2Total net sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of sales:Products
    
    
    9.8
    %
    
    
    6.9
    %
    
    
    7.9
    %
    
    
    6.9
    %Services
    
    
    38.4
    
    
    
    43.5
    
    
    
    41.0
    
    
    
    51.6Total cost of sales
    
    
    14.6
    
    
    
    12.2
    
    
    
    14.5
    
    
    
    14.6Gross profit:Products
    
    
    90.2
    
    
    
    93.1
    
    
    
    92.1
    
    
    
    93.1Services
    
    
    61.6
    
    
    
    56.5
    
    
    
    59.0
    
    
    
    48.4Total gross profit
    
    
    85.4
    
    
    
    87.8
    
    
    
    85.5
    
    
    
    85.4Operating expenses:Product development
    
    
    14.2
    
    
    
    11.7
    
    
    
    13.7
    
    
    
    11.6Selling and marketing
    
    
    21.4
    
    
    
    22.7
    
    
    
    25.3
    
    
    
    25.3General and administrative
    
    
    10.4
    
    
    
    10.1
    
    
    
    10.8
    
    
    
    10.1Total operating expenses
    
    
    46.0
    
    
    
    44.5
    
    
    
    49.8
    
    
    
    47.0Operating income
    
    
    39.4
    
    
    
    43.3
    
    
    
    35.7
    
    
    
    38.4Other, net
    
    
    1.7
    
    
    
    1.0
    
    
    
    1.9
    
    
    
    1.1Income  continuing operations
before income taxes
    
    
    41.1
    
    
    
    44.3
    
    
    
    37.6
    
    
    
    39.5Income taxes  continuing operations
    
    
    15.2
    
    
    
    16.5
    
    
    
    13.9
    
    
    
    14.7Income  continuing operations
    
    
    25.9
    
    
    
    27.8
    
    
    
    23.7
    
    
    
    24.8Income (loss) on discontinued
operations, net of tax
    
    
    
    
    
    
    (2.6
    )
    
    
    1.0
    
    
    
    (2.6
    )Net income
    
    
    25.9
    %
    
    
    25.2
    %
    
    
    24.7
    %
    
    
    22.2
    %
 -8-




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##### Table of Contents



Three Months Ended June 30, 2005 and 2004
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 
 *
    
    AR, AccelScan, AccelTest, Accelerated Grammar and Spelling, Accelerated Math, Accelerated
Reader, Accelerated Vocabulary, Accelerated Writer, Fluent Reader, Math Facts in a Flash, Math
Renaissance, Read Now, Reading Renaissance, Renaissance, Renaissance Learning, Renaissance Place,
School Renaissance, STAR Early Literacy, STAR Reading, STAR Math, StandardsMaster, TestCheck and
Writing Renaissance are trademarks of Renaissance Learning, Inc. registered ® or pending
registration in the United States, with other applications issued or pending in other countries. -9-




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##### Table of Contents



Six Months Ended June 30, 2005 and 2004
 Net Sales
  Cost of Sales
  Product Development
 Selling and Marketing
 General and Administrative
 Operating Income
 Income Tax Expense  Continuing Operations
 Discontinued Operations
 -10-




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Liquidity and Capital Resources
    Off-Balance Sheet Arrangements and Aggregate Contractual Obligations
    Payments due by PeriodTotal
    
    Less than
    
    1- 3 years
    
    3-5 years
    
    More than(In thousands)
    
    
    
    
    
    1 year
    
    
    
    
    
    
    
    
    
    5 yearsOperating lease obligations
    
    $
    3,260
    
    
    $
    1,318
    
    
    $
    1,506
    
    
    $
    358
    
    
    $
    79Purchase obligations
    
    
    1,124
    
    
    
    1,124
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    $
    4,384
    
    
    $
    2,442
    
    
    $
    1,506
    
    
    $
    358
    
    
    $
    79
 Critical Accounting Policies and Estimates
  -11-




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##### Table of Contents



Forward-Looking Statements
 Business Forward-Looking Statements; Risk Factors
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 Interest Rate Risk
 Market Risk.
   Foreign Currency Exchange Rate Risk.
 -12-




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##### Table of Contents



Item 4. Controls and Procedures
     
 Item 5. Other Information
   
 Part II  OTHER INFORMATION
 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
  -13-




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##### Table of Contents



Total Number of
    
    MaximumShares
    
    Number ofTotal
    
    
    
    
    
    Purchased as
    
    Shares that MayNumber of
    
    Average
    
    Part of Publicly
    
    Yet Be PurchasedShares
    
    Price Paid
    
    Announced Plans
    
    Under the PlansPeriod
    
    Purchased
    
    per Share
    
    or Programs
    
    or ProgramsApril
    
    
    69,900
    
    
    $
    16.20
    
    
    
    69,900
    
    
    
    3,380,458May
    
    
    96,500
    
    
    
    18.78
    
    
    
    96,500
    
    
    
    3,283,958June
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    3,283,958Total
    
    
    166,400
    
    
    $
    17.69
    
    
    
    166,400
 
 Item 4. Submission of Matters to a Vote of Security Holders
 (a)
    
    On April 20, 2005, the Company held its Annual Meeting of Shareholders.(b)
    
    Not applicable.(c)
    
    Set forth below is a description of the matter voted upon at the Annual Meeting of
Shareholders and the number of votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes, as to such matter.
 1.
    
    Eight directors were elected to serve until the 2006 Annual Meeting of Shareholders and
until their successors are elected and qualified. The results of this proposal are as
follows:
 For
    
    Against/Withheld(1)Judith A. Paul
    
    
    30,525,957
    
    
    
    38,588(2)Terrance D. Paul
    
    
    30,526,657
    
    
    
    37,888(3)John R. Hickey
    
    
    30,527,523
    
    
    
    37,021(4)John H. Grunewald
    
    
    30,455,845
    
    
    
    108,700(5)Gordon H. Gunnlaugsson
    
    
    30,513,364
    
    
    
    51,181(6)Harold E. Jordan
    
    
    30,513,624
    
    
    
    50,921(7)Addison L. Piper
    
    
    29,737,701
    
    
    
    826,844(8)Judith A. Ryan
    
    
    30,512,424
    
    
    
    52,121
 (d)
    
    Not applicable.
 -14-




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##### Table of Contents



Item 6. Exhibits
  Exhibit No.
    
    Description10.1
    
    Form of Restricted Stock Agreement10.2
    
    Executive Officer Compensation Summary31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch
 -15-




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##### Table of Contents



SIGNATURES
  RENAISSANCE LEARNING, INC.(Registrant)August 8, 2005
    
    
    
    /s/ John R. HickeyDate
    
    
    
    John R. HickeyPresident and Chief Executive Officer(Principal Executive Officer)August 8, 2005
    
    
    
    /s/ Mary T. MinchDate
    
    
    
    Mary T. MinchVice President-Finance, Chief Financial Officer and Secretary(Principal Financial and Accounting Officer)




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##### Table of Contents



Exhibit No.
    
    Description10.1
    
    Form of Restricted Stock Agreement10.2
    
    Executive Officer Compensation Summary31.1
    
    Section 302 certification by John R. Hickey31.2
    
    Section 302 certification by Mary T. Minch32.1
    
    Section 906 certification by John R. Hickey32.2
    
    Section 906 certification by Mary T. Minch